The debt woes continue in the economy of the United States as Moody’s announces the downgrade of Bank of America, Wells Fargo, and Citigroup, three of the biggest banks in the country, basing the decision on the hunch that the US government will be unlikely to bail out failing institutions in the future, both for political as well as simple budgetary reasons. They’re probably right.
The bank bailouts were some of the most politically contentious events in recent decades of American history, and the subsequent bonuses and sparse lending practices were right maligned for defeating the purpose of the bailout in the first place; banks were able to announce profits based on increased revenues; not because of business success, but simply due to taxpayer bailout, which led to a positive balance sheet, and continued exorbitant executive pay.
Now that the United States is in worse debt than ever, as well as the political climate dictating the distaste of corporate welfare more so than before (despite its ongoing presence in a large number of industries), it seems unlikely that these institutions will have anywhere to go if they screw up as badly in the near future. Americans will be less enthusiastic about supporting those failing institutions, and the government will simply lack the capability of doing so.
However, such events do not need to be seen as experimentation, as similar circumstances in Iceland led to the outright failure of those banks, which the government did not bail out of difficulties; though Iceland certainly has its economic difficulties at the moment, allowing the banks to fail did not lead to the imminent economic catastrophe that some analysts predicted.
Such events are likely to spell the demise, or at least extraordinary difficulty, of major banking institutions if they run into the same difficulties as that which led to the bailout to begin with; the case is stronger than ever (though not ironclad) given the Iceland scenario, that allowing banks to fail may very well be the right thing to do in the future. Though regardless of whether it is pragmatic to do so, it may occur simply out of economic and political reality.
Knowing of such circumstances is likely to spur Bank of America and others to redouble their efforts to become efficient businesses again, though it is doubtful such efforts will result in multi-decade stability, given the inevitable turnover of CEOs and so on; but these banks are likely to recognize the realities of the end of their dependence on federal support, at least in the short run. It will be no revolution by any means, but they have enough capital and power to run themselves better than before.
On the other hand, several developments are playing out right now that don’t look so good for the future dominance of American finance; Canadian banks are buying up American assets (such as TD buying Bank of America’s MBNA accounts), as well as banks altogether. There is very little throughout history to indicate that selling off assets to others who will then receive the profits is a good way to ensure profitability; some banks are in a position of needing to do so, and must; but it is likely that those buying up bargain-priced assets are the ones that will win in the long run, and if they’re Canadian, investors will start looking north for opportunities.
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